Books of prime entry Revision Notes

Books of prime entry are specialised accounting records used to initially record financial transactions before posting them to ledger accounts. Using different books for different types of transactions organises data systematically, reduces errors, and simplifies ledger posting.

Each book focuses on a particular transaction type, making it easier to check and trace entries. For example, credit sales are recorded in the sales journal, while cash transactions go into the cash book. This separation improves accuracy and efficiency in accounting processes.

By summarising transactions in these books, accountants avoid cluttering ledger accounts with individual entries, instead posting totals periodically. This also helps in detecting errors early and maintaining clear audit trails.

• Organise transactions by type for clarity and accuracy.
• Simplify ledger posting by summarising transactions.
• Improve error detection and audit trails.

The main books of prime entry include: the cash book, petty cash book, sales journal, purchases journal, sales returns journal, purchases returns journal, and the general journal.

The cash book records all cash and bank receipts and payments. It acts both as a book of prime entry and as a ledger account for cash and bank balances.

The petty cash book records small cash expenses paid from a petty cash float, managed under the imprest system (explained later). It helps control minor expenditures separately from the main cash book to avoid cluttering it with small transactions.

• Cash book: records cash and bank receipts/payments; dual role as ledger account.
• Petty cash book: records small cash expenses; controlled by imprest system.
• Sales journal: records credit sales only.
• Purchases journal: records credit purchases only.
• Sales returns journal: records returns of goods sold on credit.
• Purchases returns journal: records returns of goods bought on credit.
• General journal: records transactions not fitting other books, e.g., corrections, depreciation.

After transactions are recorded in the appropriate book of prime entry, the next step is to post the relevant totals or individual entries to ledger accounts.

For example, credit sales recorded in the sales journal are posted to the sales ledger account and the debtor’s account. Similarly, purchases journal entries are posted to the purchases ledger and creditor’s accounts.

The cash book’s totals update the cash and bank ledger accounts directly since it acts as both book of prime entry and ledger account. Petty cash book totals update the petty cash ledger account periodically.

• Post totals from journals to corresponding ledger accounts regularly.
• Cash book entries update cash and bank ledger accounts directly.
• Petty cash book totals update petty cash ledger account.
• General journal entries post to various ledger accounts depending on transaction nature.

Trade discounts are reductions in the listed price offered by suppliers or sellers to encourage bulk purchases or customer loyalty. They are deducted before recording the transaction and do not appear in the accounting records as separate entries.

For example, if goods cost £1,000 with a 10% trade discount, the purchase is recorded at £900.

Cash discounts are reductions allowed for prompt payment, recorded separately in the accounts. They affect the amount paid or received and are recorded in discount accounts to reflect the financial benefit or cost of early payment or receipt.

• Trade discount: deducted before recording; not entered separately in accounts.
• Cash discount: recorded separately; affects payment amount and discount accounts.
• Example: £1,000 goods with 10% trade discount recorded at £900; if 2% cash discount for early payment, payment is £882 (£900 - £18).

The cash book records all cash and bank transactions and serves as both a book of prime entry and ledger account for cash and bank balances. This means entries are recorded once and balances updated immediately.

Payments and receipts made through bank transfers or electronic methods (e.g., direct debits, online payments) are recorded in the bank column of the cash book, just like cheque or cash transactions.

For example, a payment made by bank transfer to a supplier is entered as a credit in the bank column of the cash book and the corresponding debit in the supplier’s ledger account.

• Cash book records cash and bank transactions; acts as ledger account.
• Electronic payments recorded in bank column of cash book.
• Example: bank transfer payment reduces bank balance and creditor’s account.

The imprest system controls petty cash by setting a fixed float amount, say £100, to cover small expenses.

When petty cash is spent, receipts are collected and recorded in the petty cash book. At regular intervals, the petty cash is reimbursed to restore the float to its original amount.

For example, if £40 is spent, the petty cash custodian submits receipts and is reimbursed £40, bringing the float back to £100. This system ensures accountability and prevents overspending.

• Set fixed petty cash float (e.g., £100).
• Record all petty cash expenses with receipts.
• Reimburse petty cash to restore float regularly.
• Controls small cash expenses and maintains accurate records.